Monetary transmission mechanism in Kyrgyzstan: an econometric analysis

The monetary policy which is regulated by the monetary authority affects the real economy through different interdependently working transmission channels. This study focuses on traditional interest rate channel, bank lending channel and exchange rate channel of monetary transmission mechanisms of the Central Bank of Kyrgyzstan. To determine the channel through which monetary policy effects real output and price level in Kyrgyzstan, employing monthly data from January 2000 to November 2016, impulse-response and variance decomposition analyses within the vector autoregression approach (VAR) is utilized. As a result of the study, it is found that the traditional interest rate channel is effective on the prices but it is ineffective on the output in Kyrgyzstan. The exchange rate channel of monetary transmission plays an important role in emerging and open countries like Kyrgyzstan, is found to be effective on the inflation rate but ineffective on the real GDP growth. According to the analysis for the bank lending channel, both the inflation rate and the real GDP growth responded positively to one unit of shock in the real credit volume of the banks. Shortly, according to the empirical findings of this study for Kyrgyzstan, the central bank of Kyrgyzstan and the government will be able to use the bank credit channel of monetary transmission to increase real production; and in order to keep price stability, they will be able to use the exchange rate channel and the interest rate channel.